Sembcorp Industries Europe NDR – scenario planning for marine

Privatisation of SMM is not accretive now and rights issuance may not be necessary if the yard is able to manage cash receipts from customers in 2016.

SCI’s focus is to ensure successful execution of new projects in India and China and be selective on new M&As, preserving funds to help SMM if need arises.

Maintain Add and SOP-based target price of S$3.10.

Scenario planning in Marine

Privatisation of Sembcorp Marine may not be earnings accretive for SCI given the challenging order momentum in the near-term. 2017 could be an inflexion point for SMM if oil prices rebound above US$60/bbl before major capex spending resumes.

Meanwhile, the yard is diversifying its product offerings to floating production (SSP) and modular LNG terminal (Gravifloat). Order size could range from US$200m to US$1bn. We keep our S$1.5bn order target for 2016.

Rights issuance may not be required if SMM manages to collect final payments from project deliveries. The recent transfer of jack-up from troubled Hercules Offshore to Maersk Drilling provided slight relief on cashflow as SMM will receive US$196m for the final 80% payment.

Including this, we estimate SMM to receive c.S$1.3bn (US$1bn) in FY16 from the deliveries of CJ70 for Noble (US$460m), Denorske platform (US$145m), FPSOs for Libra and Modec (totaling US$160m). Net gearing could improve to 0.7x by end-16 (1Q16: 1.15x).

Risk of impairment for new Brazilian yard is not imminent as SMM could be one of the few surviving yards after other local yards pulled out of the sector. The group still hopes to resume building three to four drillships for Petrobras. SMM may also securitise some of the contentious non-Petrobras rigs to ease its cashflows.

India – limiting exposure

In our view, SCI could be capping its exposure from India to 30% of utilities earnings by FY18, starting with c.10% in FY16. The end game for India is to spin off/list when the plants are stabilised.

Sembcorp Gayatri Power (SGP) has been qualified as an L1 bidder (cheapest tariffs) for a long-term PPA for Andhra Pradesh for c.500MW. The finalisation of the PPA hinges on the debt restructuring scheme, UDAY (Ujwal DISCOM Assurance Yojana) Scheme to turnaround highly indebted state power distribution companies in India. SGP could sell into the spot market to commission the plant in 4Q16.

Singapore’s hope is in the long-term depletion of piped natural gas

The overcapacity situation in Singapore could bottom by 2017, one year after the last addition (Hyflux’ 411MW power plant) was commissioned, in our view.

The gradual depletion of natural gas fields in Sumatra, Indonesia (Indonesia supplies c.60% of gas to Singapore) could partially resolve the gas oversupply situation in Singapore which caused aggressive new power planting in the recent years.

Partial shut-down of loss-making gencos could also see consolidation of supply.

Maintain Add and target price of S$3.10

Current valuation implies that utilities business is trading at 0.5x CY16 P/BV, which is undemanding vs. its ROE of 7%. This is also below regional water and power peers average of 1.3x with similar returns.

Catalysts could come from stronger earnings from India and oil price recovery.

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